The consequences of trade policy are becoming clear, and the sorghum producers are the first to be hit. Soybean and beef producers could well be next.
China, retaliating for tariffs on solar panels, has filed a WTO protest of “dumping” against the U.S., and the market response has been a steep drop in price along with a “NO BID” at the Gulf.
Ahead of the announcement of the tariff, the sorghum market, thanks to steady buying from China, was on a roll. Prices had been going up and up — in fact sailing past corn, which as a general rule sells at a premium to sorghum.
The hit to sorghum is especially costly, because about 63% of the sorghum grown in the U.S. is exported. China has been buying 80-90% of all the sorghum exported. Because Kansas is the top sorghum producer in the U.S., that hit has been especially hard in Kansas.
For Chinese livestock producers, sorghum is a feed grain of choice because it is much cheaper than imported corn. In 2017, China paid an average of $350 per metric ton for imported corn and $220 for sorghum. For U.S. grain, China paid an average of $492 a ton for U.S. corn and $219 for U.S. sorghum.
President Donald Trump is correct that there is a trade imbalance with China, as the U.S. imports more Chinese goods than it exports to the Asian giant. The problem comes in trying to figure out how to do that, especially when it comes to addressing issues that aren’t covered by WTO.
Chinese investment rules, industrial policies, subsidies to state-owned enterprises, excess manufacturing capacity, cybersecurity regulations and forced technology transfers are not fully covered in WTO rules. Of particular concern are violations of intellectual property rights.
Most of those problems, however, are of greater concern to U.S. manufacturing than to U.S. agriculture.
It makes it extremely problematic for U.S. agriculture, which stands to be substantially hurt by efforts to make things right for manufacturing.
When it comes to food and feed, China needs imports from the U.S. They do not have sufficient arable land to feed their population, and that situation has only been made worse by the conversion of thousands of hectares of farmland to industrial sites and urban housing.
When it comes to manufacturing, those thousands of people in new cities are seeing a marked increase in income even at wages far below what U.S. workers earn.
They naturally want to spend some of that income on a better diet, and that means they want dairy products and meat. That generates a need to import poultry, pork and beef from other countries, and to import corn, sorghum and soybeans to feed domestic livestock production.
All of that explains why China has been buying 80-90% of all the sorghum exported by the U.S. But the willingness of the Chinese government to simply shut down U.S. imports in retaliation for the tariffs on solar panels also illustrates its willingness to deprive its own population to win a trade battle.
The real question in this battle is who can hold out longer. U.S. agriculture was hurting before this punch to the gut landed. Farmers are calling, writing and emailing their Congressional delegations begging for a resolution to the issue. Chinese consumers have less ability to influence government decisions.
Meanwhile, soybean producers and their commodity groups are bracing, as they are likely to be the next commodity to be hit.
Soybeans to China are a $14 billion a year business for U.S. producers. Already, China has tightened quality requirements for U.S. soybeans, demanding less than 1% foreign matter. About half of the U.S. soybeans exported in 2017 will not meet the new standards, which went into effect on Jan. 1.
Beef exports are also vulnerable to being hit by a trade war. China could push phytosanitary concerns in refusing to import U.S. beef, even though such claims are not scientifically sound.
The bottom line is that a trade war with China is not a good thing for U.S. agriculture. Sorghum producers are on the leading edge of that lesson. There could be increasingly painful lessons ahead.